Scan Based Trading and Bargaining Equilibrium: a Structural Estimation of Channel Surplus

Abstract

Scan Based Trading (SBT) represents a type of replenishment system in which the supplier retains title until the product is scanned through checkout at the retail store by the consumer. Although SBT carries potential benefits for both parties in the supplier-retailer dyad, it may also yield asymmetric gains to these parties, particularly because SBT can impose upon suppliers greater inventory costs through shrink. Whether retailers or suppliers can extract a higher share of channel surplus depends on their relative bargaining power and bargaining positions. Our objectives are to identify and document the benefits in terms of channel surplus creation and allocation, and changes in shrink levels, among parties in a vertical channel under SBT vis-à-vis vendor-managed inventory (VMI) contracts. We apply an empirical Nash-in-Nash bargaining approach to examine how bargaining power, as manifested in shrink, differs between SBT and VMI contracting using product-level data that describe sales, returns, and inventory levels involving a major U.S. bakery supplier and a set of retailers. We find that retailer bargaining power is higher under SBT relative to VMI contracts. Our counterfactual simulations show that the direct effects of retailers switching from VMI to SBT contract regimes generate an average increase of 24% in total channel margins, allowing retailers to earn about 21% more margins, while their margin-share decreases by approximately 2%. We attribute retailers’ lower margin-share to suppliers’ stronger bargaining position as they bear the cost of shrink. Moreover, we find evidence supporting positive spillover effects among retailers already operating under SBT contracts when competing retailers switch from VMI to SBT contract regimes. We discuss the implications for managers should they choose to enter into SBT contracts.